In takeovers of listed companies, whether effected on a stock exchange through the acquisition of shares or outside a stock exchange by gaining control of the company through the acquisition of shares directly from shareholders, the takeover bid (TOB) procedure is crucial. In Japan there have been situations where trading through the Tokyo Stock Exchange Trading Network System (ToSTNeT) was used to circumvent the TOB system then in effect. An example of this is Livedoor’s attempted hostile takeover of Fuji Television’s parent company, Japan Broadcasting, in 2005. Accordingly, Japanese laws have since broadened the circumstances under which the mandatory TOB procedure must be followed. As a result, the law in this area has become quite complex.
When the procedure applies
The basic law governing the TOB system in Japan is the Financial Instruments and Exchange Law. The government decrees and other
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procedural rules that serve as its subordinate legislation are intricate and complex. The procedure to be followed during a takeover varies tremendously depending on whether the TOB procedure must be followed. The costs involved (such as securities company service charges) also vary greatly, as does the control premium (i.e. the portion by which the price that the acquirer pays to secure control of the target company exceeds its market value). Accordingly, in a takeover plan, an accurate understanding of the conditions that trigger the TOB procedure is crucial. In general terms, the TOB procedure must be followed in the following circumstances:
- if the acquisition target has not only shares, but also warrants and warrant bonds;
- if, after an acquisition of shares off the market, the percentage of the target company’s shares held by the acquirer and its connected persons would exceed 5% unless, within 60 days, persons numbering fewer than 10 attempt a takeover;
- if, within 60 days, the shareholding percentages of persons numbering fewer than 10 exceeds one-third after acquiring shares off the market;
- if, through ToSTNeT trading or other such so-called specific trading, the shareholding percentage of the acquirer exceeds one-third; or
- if, within three months, more than 10% of the shares are secured through acquisition or the issuance of new shares and if among those a portion exceeding 5% of the shares was acquired off the market and if, thereafter, the acquirer’s shareholding percentage exceeds one-third, he will be required to carry out the TOB procedure (the so-called rapid acquisition rule).
- The regulation of simple share increases (issuances of new shares) targeted at particular third parties is not one of the objectives of the TOB system. However, in the event of a conflict with the rapid acquisition rule, share increases do become a target of the TOB rules.
- The acquisition of shares from an affiliate (more specifically, a person that satisfies the definition of “connected person”) is not subject to the TOB system because there is no change in control.
The reason that the one-third shareholding percentage is used in the aforementioned rules is that in Japan, the holding of two-thirds of the shares of a company gives the holder a veto over resolutions passed at the shareholders’ general meeting, thereby giving considerable control over the company.
The TOB procedure
The TOB procedure to be followed in a friendly takeover, which takes between 20 and 60 days to complete, is set forth below. (A different procedure is followed in a hostile takeover.)
The acquirer may determine the takeover price based on the share price and his objectives, but he is required to disclose in detail the basis of the calculation. Accordingly, if the TOB procedure is to be carried out by offering a large premium or at a discount, the acquirer needs to consider whether he can substantiate the reasonableness of the basis upon which the price was calculated.
A ceiling or a floor may be set with respect to the quantity of shares to be acquired. However, in order to protect minority shareholders, if the acquirer’s shareholding percentage would exceed two-thirds after the acquisition, he must acquire all of the target company’s shares.
Elimination of minority holders
After an acquirer has become the majority shareholder, he may eliminate the remaining minority shareholders through a merger or share swap to exchange their shares for cash. While this is a common method, the acquirer is required to ensure that the price at which the TOB transaction was completed and the price of the post-TOB transactions are consistent.
Hiroshige Nakagawa is a partner at Anderson Mori and Tomotsune and chief representative of its Beijing office.
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